A majority of condominium properties in the United States that apply to receive Federal Housing Administration (FHA) approval are failing to attain it, thanks to what the real estate industry is calling unnecessarily strict requirements.
After credit was reined in amid the 2008 financial crisis, FHA-approved loans began to play a larger role in the housing market. FHA-approved loan insurance is designed to make it easier to attain homeownership. FHA-backed mortgages, which, to varying degrees, protect lenders against defaults on these types of loans, come with down payments as low as 3.5 per cent.
At the Realtors Conference and Expo in San Francisco on November 9, a panel of members discussed what impact FHA rules have on a business. According to the National Association of Realtors (NAR), the FHA rejected 60 per cent of condo projects seeking approval in 2013, compared to only 20 per cent in 2011.
This has been problematic, as FHA-approved buyers are limited to purchasing FHA-approved properties. As a result, unit owners in non-FHA-approved condominiums trying to sell their property in a housing market still in recovery are restricted to an even smaller pool of potential buyers.
Realtor Seth Task, vice-chair of the NAR’s federal finance and housing policy committee, attributes the drop in FHA approvals to changes in its lending policy for condos that “tightened the screws.”
The Housing and Economic Recovery Act of 2008 required a new, yet-to-be-released condominium rule to be written. In the interim, changes have been issued via administrative notices. Task says that the key changes to the policy included requiring recertification every two years and making the recertification process nearly as intensive as the initial certification process.
“We certainly understand that FHA needs to protect itself and that they’ve got to protect their insurance funds, but condominium unit mortgages are among the strongest performing in the entire FHA portfolio,” he says.
Task cites the non-profit Foundation for Community Association Research, which estimates that there are approximately 155,000 condominium projects in the United States, of which only 14,650, or about 10 per cent, are FHA-certified.
He explains that the onerous process discourages volunteer condo association leaders from even attempting to seek approval. They may decide that it is neither worth the time and effort it takes to do it personally, nor the $1,500 to $3,000 it costs to have a third party complete the application.
As an example, Task offers the case of a 24-unit condominium in Ohio. A unit owner wanted to sell, but the owner (along with the condo association) didn’t want to pay $2,000 to have the condominium approved. While the approval would have increased property values, the condo association would have had to collect the money from the dues of association members to obtain the approval, which would then lapse within two years.
“(These requirements are) contradictory to a condominium market that is just not rebounding as fast as the single-family market,” Task says.
The NAR is calling on the FHA to move to an electronic database, so condo associations don’t have to re-file the same documents at recertification unless information needs to be updated. He also wants to see the recertification period lengthened to five years.
Joanne Kuczma, a housing program officer at the Department of Housing and Urban Development (HUD), says that there are many reasons that loan insurance applications fail, the most common being financial instability, pending litigation, insufficient insurance coverage, and missing or outdated documentation.
“The goal isn’t to reduce FHA’s footprint in the condo market, but to ensure that homeowners are buying into a viable, sustainable homeownership opportunity,” she says.
That said, changes to the program may be forthcoming. HUD is contemplating reinstating spot approval so that individual condominium units can be FHA-approved — even if their condominium building isn’t.
NAR anticipates that any changes to spot approval policies will come as part of the new condominium rule HUD is expected to put forward in 2014. Task says that if adopted, the reinstatement of spot approval will be a “big win,” but it still will not fix all of the program’s problems. He highlights other areas in that need to be addressed, such as the 50 per cent owner-occupancy ratio required for a condominium to be eligible for FHA approval, and inconsistency in approval requirements across government-sponsored enterprises like Fannie Mae and Freddie Mac.
“If somebody is creditworthy, they should be able to buy the property they want to buy,” Task says. “That’s the American dream.”
Michelle Ervin is the editor of CondoBusiness.